How Is Pre-Settlement Funding Different From Personal Loans?

Pre-settlement funding is a relatively new service that you may have heard someone mention as a way to get money while you have a lawsuit pending. A funding company gives a cash advance based on the settlement value of the lawsuit that can be used by the plaintiff, which is the term that lawyers use for the party bringing a lawsuit. The money you receive as a cash advance may be used for any reason, but one of the frequent uses is to relieve financial pressures from being out of work while recovering from injuries suffered in an accident. 

There are many funding companies that offer pre-settlement funding. Some of them refer to their service as a “lawsuit loan,” which leads to confusion between pre-settlement funding and personal loans. It certainly does not help to ease the confusion that funding companies charge interest for their service. It certainly sounds like a loan, but there are significant differences between pre-settlement funding and personal loans that you should consider when deciding whether to apply for a cash advance. 

What is pre-settlement funding? 

When another person or a company acts in a way that causes you harm, the law gives you the right to sue to recover damages. The problem is that a lawsuit takes time to make its way through the courts before there is a settlement or a judgment in favor of the injured party. Even when a case is settled, a plaintiff may be forced to wait before actually receiving any money. 

While they wait, many plaintiffs experience financial hardship from being out of work either recovering from injuries suffered in an accident or from being unable to find a job after being wrongfully fired by an employer. Financial companies saw the need for a service that gives people awaiting settlements access to a portion of the value of their lawsuits. The money advanced is eventually repaid from the settlement funds along with interest and fees charged by the funding company.

Pre-settlement funding is only one of several names given to the product offered by funding companies.

Other names include the following: 

·         Lawsuit loan.

·         Lawsuit funding.

·         Lawsuit cash advance.

·         Litigation funding.

·         Settlement funding.

·         Non-recourse advance. 

Generally, you must have a lawsuit for money damages pending in a state or federal court and be represented by an attorney before applying for lawsuit funding. Types of cases that may qualify include: 

·         All types of personal injury lawsuits, including car accidents, slip-and-fall accidents, and defective and dangerous products cases.

·         Discrimination and civil rights cases.

·         Workers’ compensation claims.

·         Wrongful termination claims. 

An example of a lawsuit that would not qualify for lawsuit funding would be a divorce action because it primarily seeks the termination of a marriage rather than monetary damages.

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How does lawsuit funding work?

You must have a lawsuit seeking monetary damages pending in a state or federal court and be represented by an attorney to file an application for pre-settlement funding. The application, which can be completed online, asks for information about the lawsuit and the name and contact information of the attorney representing you. 

The primary focus of the application and the underwriting process of the funding company is on the lawsuit. The company wants to determine whether you have a valid, winnable claim for damages, so it gets most of the information it needs from your attorney. This includes copies of medical records and other forms of evidence that proves the validity of the claim and the likelihood of the lawsuit resulting in a settlement or verdict in your favor. 

Evaluating the lawsuit to determine its ultimate value is another key element of the underwriting process. The funding company recovers the money it advances along with the interest and fees that it charges from the settlement or verdict, so it needs to make sure that there will be sufficient funds available to recover what it is owed.

The interest, fees, and terms of pre-settlement funding are contained in an agreement that you make with the funding company after approval of your application for a cash advance. Generally, those terms do not hold you personally responsible for the repayment of the money advanced and the interest and fees charged by the company regardless of the outcome of the lawsuit. 

How does pre-settlement funding differ from a personal loan? 

A personal loan is a financial arrangement that you negotiate with a bank, credit union, or a friend or relative. The lender agrees to give you a specified sum of money in exchange for your promise to repay what you borrow plus interest. The typical personal loan provides for monthly payments of principal and interest over time until you repay the debt in full. 

The personal obligation of the borrower to repay the debt is the most glaring difference between personal loans and lawsuit funding. If you make payments on a personal loan, the lender has the legal right to go after you and your personal assets to recover what you owe.

Pre-settlement funding agreements typically do not allow the funding company to look to you or your personal assets for repayment. The settlement or judgment in the lawsuit becomes the funding company’s sole source of repayment of the cash advance plus the interest and fees charged. Other ways that personal loans and pre-settlement funding differ include:

·         Your credit history and ability to repay the debt are key underwriting considerations with personal loans. Lawsuit funding companies do not ask for personal credit or income information.

·         A personal loan adds another payment to your monthly debt obligations while lawsuit funding does not.

·         A personal loan increases your debt and affects your credit score, but lawsuit funding does not because it is not a personal obligation that you owe.

·         Funding companies take the risk that you may lose the lawsuit or not receive enough money by way of settlement or verdict to repay the money advance and its costs. Lenders look to you, the borrower, for repayment of the debt, to minimize their risk.

Another factor to consider is the difference in state and federal regulation over personal loans and pre-settlement funding. More laws exist regulating personal loans than lawsuit funding, so consumers need to do their research before choosing a company to fund a cash advance.

Conclusion 

The higher cost of pre-settlement funding than you would pay for a personal loan must be considered when looking for an option to solve financial challenges while waiting for the settlement of a lawsuit. Talk to your attorney about options that may be available in addition to lawsuit funding and weigh the pros and cons of each before making a decision.